For many buyers, the hardest part of buying a home is saving up the down payment. If most of your money is tied up in a 401(k), the question is natural: should you dip into retirement savings to buy a house?
Before you touch your retirement, remember: one of the best ways to save thousands is simply to compare lenders. A lower rate or fewer fees often saves more than raiding your 401(k). But if you’re considering it, here’s what it actually looks like in practice.
Two main ways to use your 401(k)
1. Borrow with a 401(k) loan
- How much you can borrow: Up to $50,000 or 50% of your vested balance, whichever is less.
- Repayment: Typically five years, though longer is allowed for your primary home. Payments come from your paycheck.
- Interest: Usually prime +1–2%, but it goes back into your account.
- Risk: Leave your job and the balance is due within 60 days — otherwise it’s treated as a taxable withdrawal with penalties.
Example: Maria has $70k in her 401(k). She borrows $35k for a down payment on a $300k starter home. Her repayment is ~$320/month. She gets into her home sooner, but if she loses her job, the loan flips into a taxable withdrawal overnight.
2. Take a 401(k) withdrawal
- How it works: Money comes out permanently, no repayment.
- Taxes + penalties: If you’re under 59½, expect income tax plus a 10% penalty.
- Future cost: You lose decades of compounding growth.
Example: James withdraws $20k at age 32. After taxes and penalty, he nets only ~$13.5k. That $20k could have grown to over $60k in 20 years. He’s trading long-term wealth for short-term access.
Quick scenario: $80k now vs $80k later
| Scenario | What happens now | What it costs later |
|---|---|---|
| Borrow from 401(k) | $80k loan → 20% down on a $400k home today | Repay loan, but lose years of investment growth. That $80k left untouched could have doubled or tripled over 30 years. |
| Keep funds invested | Wait 5 years, buy a $425k home with savings | 401(k) grows to ~$112k at 7% growth, but risk of higher home prices and rates. |
It’s the classic trade-off: quick access to cash now versus a bigger retirement balance later.
Other ways buyers use 401(k) loans
- Renovations: Priya used $15k to fix her kitchen, paying herself back instead of using a high-interest personal loan.
- Debt payoff: Sarah used $12k to clear credit cards, improving her debt-to-income ratio before applying for a mortgage.
- Bridge funding: David borrowed $25k for a down payment while waiting to close on the sale of his old home.
Smarter alternatives before tapping retirement
- Low down payment mortgages: FHA loans (3.5% down), VA and USDA loans (0% down for those who qualify).
- Down payment assistance programs:
- California Dream For All Shared Appreciation Loan — up to 20% of the purchase price.
- Texas Homebuyer Assistance Program — up to 5% of the loan amount.
- Florida Hometown Heroes Program — up to $35,000.
- NYC HomeFirst Down Payment Assistance — up to $100,000.
- Gift funds from family — allowed by many lenders if properly documented.
- Savings strategies — build staged goals ($5k, $10k, $15k) to keep momentum.
Example: Buyer C in Texas combined $8k in assistance with an FHA loan, covering nearly her entire down payment without touching her 401(k).
The bottom line
Using a 401(k) for a home can be a bridge, but it’s rarely the cheapest option. Loans are safer than withdrawals, but both come with trade-offs: extra monthly payments, tax risk, and lost retirement growth.
Ask yourself:
- Can I reach my down payment another way?
- What’s the long-term cost to my retirement balance?
- Do I have a safe repayment plan if I borrow?
For most buyers, the smarter path is patience, assistance programs, or a low-down-payment mortgage — not tapping their retirement savings.